What's in store for the ASX tech sector in 2021?

The tech sector managed to record substantial growth in 2020 despite the COVID-19 pandemic. What does 2021 have in store for the sector?

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The global tech sector had a bumper year in 2020 with the NASDAQ gaining 40% over the year as technology companies rode a wave of COVID-19 disruption.

Australia's All Technology Index (ASX: XTX), which launched in February 2020, finished the year up 42.5%. 2021 is also shaping up to be a promising year for technology shares with government stimulus potentially providing tailwinds to the sector.

The Biden administration is expected to splash cash to get the US economy restarted, with sectors such as biotechnology and artificial intelligence prime candidates for investment. Increased investment in digital infrastructure in the US will have impacts globally, as technology becomes increasingly important in driving our lifestyles and consumption patterns. 

The coronavirus pandemic disrupted traditional ways of working, living, and shopping which largely benefitted tech shares. In 2020 we spent more time than ever online, accelerating trends such as working from home and ecommerce which have been gaining momentum in recent years.

The pandemic increased the importance of the technology sector significantly, as people turned online to manage their work and home lives. Adoption of technology accelerated sharply as the result of lockdowns, boosting tech company returns.

Many of the habits formed in 2020 will carry forward into 2021, driving long-term revenue growth for companies in the tech sector. So which areas of the tech sector should we be watching in 2021?

Digital shopping accelerates

Online shopping, which had been steadily gaining in popularity prior to 2020, received a shot in the arm last year as physical stores shuttered in the face of the pandemic.

Online retailers such as Kogan.com Ltd (ASX: KGN) were the beneficiaries. The Kogan share price gained an impressive 155% over 2020 as sales accelerated.

Online furniture and homewares retailer Temple & Webster Group Ltd (ASX: TPW) saw its share price gain 300% as revenue growth climbed through the year.

Brick-and-mortar retailers with a strong online presence such as JB Hi-Fi Limited (ASX: JBH) and Adairs Ltd (ASX: ADH) also shared in the spoils. JB Hi Fi's online sales grew by nearly 50% in FY20. Online sales accounted for 39% of total Adairs sales in the first 23 weeks of FY21, versus 20% over the same period the previous year. 

Customers introduced to the convenience and comfort of online shopping during the pandemic are expected to continue to buy online even as physical stores reopen. This means COVID-19 will not only provide a one time boost to ecommerce, but a permanent behavioural shift towards online shopping.

Statista estimates global retail ecommerce sales will grow from US$3.53 trillion in 2019 to US$6.54 trillion in 2022. That's a massive increase and will provide strong tailwinds to ASX shares in the ecommerce game. 

Buy now, pay later goes mainstream 

There is no doubt 2020 was the year that buy now, pay later (BNPL) solutions went mainstream. Australia's largest BNPL provider, Afterpay Ltd (ASX: APT), saw customer numbers increase exponentially as the share price rocketed to all time highs.

The rise in digital shopping combined with an increased focus on budgeting in the face of the pandemic, helped drive customers to BNPL providers. Afterpay reported more than 11 million customers in Q1 FY21, nearly double the number just a year earlier.

Competitors such as Zip Co Ltd (ASX: Z1P) and Sezzle Inc (ASX: SZL) saw similar increases. Zip's customer numbers skyrocketed from 1.8 million at the end of 2019 to 5.3 million in November 2020. Sezzle more than tripled customer numbers between the first quarter of FY20 and the first quarter of FY21. 

BNPL shares are still in growth mode, with many raising capital in 2020 to fund expansion. Analysts are expecting BNPL shares to continue their accelerated growth trajectory in 2021, especially in the North American and European markets.

Demographic trends also support continued growth, with millennials shunning credit cards in favour of BNPL solutions. More merchants across industries are seeking to offer BNPL solutions to attract customers, while geographic expansion is also on the cards.

BNPL solutions are disrupting the traditional credit card industry and are expected to continue to gain market share in 2021. 

Remote working solutions come to the fore 

Much of the world's workforce was sent home to work in 2020, and many found they enjoyed the flexibility it provided. Forbes has reported that an estimated 70% of the workforce will be working remotely at least 5 days a month by 2025.

Tech sector companies such as Livetiles Ltd (ASX: LVT) that facilitate remote working are set to benefit. Livetiles is an intranet and digital workplace software company. It provides tools that allow dashboards, employee portals, and corporate intranets to be created with artificial intelligence and analytics enhancements available.

ELMO Software Ltd (ASX: ELO) is another ASX tech share that facilitates remote working with its cloud-based HR software. ELMO's platform allows organisations to manage the employee lifecycle through data analysis to provide meaningful insights. With an addressable market valued around $10 billion, ELMO is looking to capture additional market share in 2021.

ASX tech sector in 2021  

The technology sector has entered 2021 in a strong position. Many of the advantageous social shifts that took place in 2020 look set to continue into 2021 providing the sector with tailwinds.

Online shopping, remote working, and BNPL gained many fans last year and are expected to continue to gain popularity in 2021.

As we become ever more reliant on technology, the future looks bright for tech investors.

Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd, LIVETILES FPO, Temple & Webster Group Ltd, and ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends ADAIRS FPO and Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended ADAIRS FPO, Elmo Software, Kogan.com ltd, LIVETILES FPO, Sezzle Inc, and Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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